Origins of Category Management

Developments Leading to Category Management

The first Walmart opened on 2nd July 1962. It was a time when retail was fragmented comprising of a large number of small stores with no leverage over dominant manufacturers. The manufacturers largely controlled the elements of the marketing mix — price, distribution, product, advertising and promotion. Today, except for a few developing countries, this scenario no longer exists.

Retailer/manufacturer relationships have changed greatly over the decades. Through consolidation major retailers amassed enormous influence within the marketplace (Walmart, for instance, generated 15% of P&G’s worldwide revenue in 2012). They acquired greater control on pricing, distribution, promotions … and with the emergence and growth of house brands, their influence on product development also grew. Increasingly brand choices are being made at point-of-purchase in their stores, and they influence those decisions through their retailing mix.

This shift in the balance of power from manufacturers to retailers inevitably led to some adjustments. Manufacturers became vulnerable to the big retailers who used their leverage to wring low prices and concessions. There was the need to move away from an increasingly distributive relationship to a more constructive, integrative relationship.

While manufacturers were struggling to maintain their scope of influence, retailers were grappling with an increasingly complex marketplace. Over the years, mass markets splintered into numerous consumer fragments, each with their own tastes, needs and values. The number of products had exploded to meet the plethora of consumer needs. Retailers found it challenging to comprehend the needs of their ever growing base of shoppers and to cope with the continually expanding glut of products. They needed a scientific, fact-driven approach to optimize their retail mix.

The time was ripe for category management.

Advent of Category Management

The term “category management” was coined by Brian F. Harris, a former professor at the University of Southern California and the founder of The Partnering Group (TPG).

In the early 1990s, TPG developed a comprehensive eight-step category management process that became accepted as the industry standard. The eight cyclical steps are as follows:

  • Define the category;
  • Define the role of the category within the retailer;
  • Assess current performance;
  • Set objectives and targets;
  • Devise strategies;
  • Devise tactics;
  • Implement plan;
  • Review.

According to a number of industry reports, organizations that successfully adopted the disciplines of category management experienced significant gains in sales and profits.  A study by Accenture (2000) for instance, claimed that retailers that adopted category management experienced up to 10% uplift in sales, 3% increase in profit margin and up to 15% reduction in inventory.

Experienced practitioners however, also pointed out that compliance has been an issue. A majority of the recommended actions specified in approved category business plans did not get implemented (TPG and Armature and Interactive Edge, 2001). So while there have been many successful implementations, the perceived promise of category management has yet to be fulfilled.

Practitioners of category management also feel that the process is complex and time-consuming; that it not only demands specialized data expertise and analytical skills, but also a high degree of coordination and cooperation between departments, and across organizations.

In part the problem probably lies with the interpretation of the TPG process. If the category management team starts with a blank sheet, the eight steps amount to a massive re-engineering exercise. Yet, today it is hard to envisage a major retailer who does not already have a number of the process steps chalked out, and an ongoing review process in place. 

Instead of re-inventing category definitions, roles and so on, the category management teams need to focus on identifying business issues, and addressing them by tweaking strategies, tactics and the retail mix. Rather than a big project, category management should be run as an ongoing process of improvement. Many of the companies that practise category management know this, and have streamlined the process to contain costs and achieve results in a timely manner.

The bigger issue is the quantum and complexity of the data. The mountains of store level scan data, loyalty panel data, and shopper research data reside in silos, accessed via legacy systems. Understandably people get overwhelmed by the numbers, and too much time is diverted to the mechanical task of populating templates. What is required are integrated business intelligence systems that facilitate the analysis and reporting of information.

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